Are Merger Clause Cases Coming to a State Near You?

Many contracts used by dealers contain a merger clause. A merger clause provides something like, “This contract contains the entire agreement between the parties. Any change to this contract must be in writing and you and we must sign it.” It was this clause that caused a dealer in Florida some trouble when the dealer tried to enforce an arbitration clause not contained in the contract.

Cassandra and Alton Rogers bought a vehicle from Duval Motors Company. At the dealership, the Rogers signed a Retail Buyer’s Order and then signed a Retail Installment Sales Contract (RISC).

The Retail Buyer’s Order identified the vehicle the Rogers were buying and stated the price. The agreement contained an arbitration provision and stated that the dealer had the right to terminate the buyer’s order if the dealer could not obtain credit approval for the buyer or if the dealer was unable to sell the RISC to a financial institution on terms of no less than face value. The agreement also stated that financing approval was a condition subsequent to the enforcement and validity of the RISC.

The RISC also identified the vehicle the Rogers were buying and provided the financial terms of the purchase including the down payment, total sale price, the total amount financed, the annual percentage rate, the total finance charge and a payment schedule. The RISC included a merger clause stating that “this contract contains the entire agreement between you and us relating to this contract.” However, the RISC did not contain an arbitration provision.

The Rogers accepted delivery of the vehicle after they signed all of the documents related to the sale and financing. Two weeks later, Duval allegedly demanded an additional $5,000 down payment. When the Rogers refused to pay, Duval repossessed the vehicle. The Rogers sued Duval. In response, Duval filed a motion to compel arbitration under the terms of the Retail Buyer’s Order. The Rogers objected, arguing that the merger clause in the RISC precluded consideration of the arbitration clause in the Retail Buyer’s Order. The trial court denied Duval’s motion to compel arbitration, finding that no binding arbitration agreement existed with respect to the transaction at issue. Duval appealed to the Florida Court of Appeals.

The court of appeals affirmed the trial court’s decision, finding that the merger clause in the RISC made it clear that the RISC was intended to constitute the entire agreement between the parties related to the vehicle purchase. As a result, the arbitration provision in the Retail Buyer’s Order was unenforceable.

A similar case out of Ohio considered the use of multiple documents in a retail installment transaction, but dealt with spot deliveries. In Patton v. Jeff Wyler Eastgate, Inc., the court considered whether a separate spot delivery agreement was enforceable in connection with an installment sale transaction where the installment contract contained a merger clause stating that the installment contract was the entire agreement between the parties. The court in Patton found that the language in the spot delivery agreement that stated "financing for your purchase has not been finalized" directly contradicted the language in the installment contract which disclosed the TILA financing terms and identified Wyler Eastgate as the Creditor-Seller to whom payments were due. The court concluded that Wyler Eastgate violated the Truth in Lending Act by using a spot delivery agreement to rescind the terms of a fully integrated retail installment contract.

After Patton, Ohio dealers sought to incorporate a seller’s right to cancel in Ohio contracts.

After Duval, Florida dealers now seek to change merger clauses contained in RISCs to incorporate all of the documents signed by buyers as part of the contract for financing. Finance companies, other than related finance companies, likely won’t support the kind of change the dealers want unless the merger clause is narrowly tailored to ensure that finance companies don’t become required to comply with all sorts of dealer documentation used in connection with the sale of the vehicle.

Dealers need to think about cases like Patton and Duval, and ensure that the documents they use work together to protect them in connection with the sale and financing of vehicles. This rule does not just apply to dealers in Ohio and Florida; a case like this may be coming to a state near you.

*Katherine C. Fisher is an associate in the Maryland office of Hudson Cook, LLP. She can be reached at 410-782-2356 or by email at kfisher@hudco.com.